Current (annualised) US Treasury spot rates are as follows

(6 months -0.4%), (1 year -0.5%),(18 months -0.6%), (2 year-0.70%)

1)Assuming that Z-spread is equal to 56 basis points, calculate the bond's arbitrage free price. Show calculations.

2)If the bond is bought 30 Sep 2016 at the arbitrage-free price and sold on 30 Sep 2017 at $101, what will be realized rate of return on bond, if no reinvestment of coupons is assumed. Show calculations. (3 marks)

3)From the US treasury spot rates (6 months -0.4%), (1 year -0.5%),(18 months -0.6%) (2 year-0.70%) assuming Z-spread of 56 basis points, 4)calculate appropriate discount rates (implied spot rates) for this bond's cash flows. Show calculations.

Using bond-specific spot rates you calculated in Question 5, derive six-monthly forward rates, including six- months forward rate 6 month from now- _0.5f_0.5,six-month forward rate 12 months from now - ₁f_0.5, and six-months forward rate 18 months from now - _1.5f_0.5 for the bond. Show calculations.

5)Estimate the bond's arbitrage free price using forward rates calculated in question 6 and comment on comparability of spot rate and forward rate pricing. Show calculations